Public Information Notice: IMF Concludes Article IV Consultation with Bolivia

October 2, 1998

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 18, 1998, the IMF Executive Board concluded the Article IV consultation1 with Bolivia and at the same time approved the authorities’ request for financial support under a new three-year Enhanced Structural Adjustment Facility (see Press Release 98/41). The IMF jointly with the World Bank decided that the conditions for reaching the completion point under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) had been satisfied. The amount of debt assistance to Bolivia from its external creditors provided under the HIPC Initiative is estimated to be equivalent to US$760 million in nominal terms. In terms of net present value, assistance under the Initiative will be about US$448 million, of which the IMF will contribute about US$29 million.


In 1997, Bolivia continued to achieve strong gains on the inflation and external fronts. Twelve-month inflation which had fallen from hyperinflationary rates in 1985 to 18 percent in December 1990 declined further to less than 7 percent by end-1997, the external debt burden—while still high—improved further, and the international reserve cushion reached comfortable levels. At the same time, the structural reforms implemented since 1985 removed many distortions and expanded access of the economy to foreign trade and capital transactions. Foreign direct investment surged from less than 3 percent of GDP in 1995 to almost 9 percent of GDP in 1997, and overall investment in the economy rose sharply. However, national savings remained low and the external current account deficit widened to more than 8 percent of GDP in 1997. Real economic activity grew by 4.2 percent, only slightly faster than the average for this decade. Moreover, while life expectancy has risen and infant mortality has declined, as of the mid-1990s, over 70 percent of the population was living below the poverty line, with half the population living in extreme poverty.

The authorities’ program for 1998 aimed to support an increase in economic growth to 4½ to 5 percent with a further reduction in poverty. The program also aimed to limit the inflationary effects of deregulation in the hydrocarbons market and reduce inflation to 6½ percent in 1998. Net international reserves were to remain constant and keep gross international reserves broadly stable in relation to imports and to short-term liabilities of the central bank. Key structural reforms included privatizing the refineries of the state petroleum company (YPFB) and the state smelting company (Vinto), improving governance through judicial and customs reform, continued strengthening of financial sector supervision, and beginning a social dialogue on labor market reform. To maintain macroeconomic stability, the authorities adopted fiscal measures yielding the equivalent of about 2.5 percent of GDP, including a sharp increase in taxes on domestic petroleum products in December 1997. These measures aimed to offset a large part of the fiscal costs of structural reforms (especially the pension reform), which were expected to rise from 3 percent of GDP in 1997 to more than 5 percent of GDP in 1998. Nevertheless, the overall public sector deficit was targeted to rise from 3.3 percent of GDP in 1997 to 4.1 percent of GDP in 1998 reflecting the costs of these reforms and unexpected temporary costs created by El Niño and the May 1998 earthquake.

So far in 1998, macroeconomic policies have remained on track. In the first half of the year, the combined public sector deficit was less than programmed, the net domestic assets of the central bank rose as expected, and structural reforms were implemented on schedule. Consumer prices rose by 6 percent in the twelve months ended in August. This price performance benefited in part from the recent decline in world petroleum prices, following the adoption of an automatic link between domestic and international petroleum prices in December 1997. Net international reserves rose in the first 8 months of 1998. Preliminary data suggest that economic activity grew by 4.7 percent in the first half of the year, led by rapid growth in construction, communications and financial services that more than offset the effect of El Niño on agricultural output. The turmoil in international financial markets has contributed to weakness in world prices of several of Bolivia’s key exports, but it has not affected Bolivia’s financial markets so far.

Looking ahead, the authorities aim to raise economic growth to 5½–6 percent by 2000 and reduce inflation gradually to 5½ percent in 2000, maintain gross international reserves at about 6½ months of merchandise imports, and keep the external current account deficit on a sustainable path. By 2002 fiscal policy would aim to fully absorb the costs of recent structural reforms and to return the fiscal deficit to its level of 1996. Meanwhile, the public sector deficit would be financed mostly with external concessional resources and declining amounts of bond financing from the private pension funds.

The authorities’ structural agenda is based on well-targeted structural programs designed to boost growth and reduce poverty. High priority will be given to strengthening education and health reforms and the rural development program, in coordination with support from the World Bank and the Inter-American Development Bank. Other key structural reforms will include making fiscal decentralization as effective as possible, completing the privatization process, carrying out another round of comprehensive financial sector reforms (including the establishment of deposit insurance), deepening of domestic capital markets, and reforming labor market legislation. Also, in their attempt to weed out corruption, the authorities will move forward on the ongoing judicial reform, a complete restructuring of customs, and will improve the transparency of government operations.

Executive Board Assessment

Directors commended Bolivia for its solid policy track record since 1985, which has achieved relatively low inflation, put the external sector on a stronger footing, and maintained economic growth at 4 - 4½ percent a year since 1990. However, Directors were concerned that, despite this strong performance and progress on the implementation of structural reforms, only gradual improvements had been made in poverty and social indicators.

Directors endorsed the authorities’ economic program for 1998-2001, which will be supported by the new ESAF arrangement, and they welcomed the authorities’ intention to publish the policy framework paper and the memorandum of economic policies. This program aims to secure a more significant reduction in poverty by encouraging faster sustainable economic growth, and strengthening the implementation of social programs. They agreed with the authorities’ decision to retain the basic medium-term strategy pursued since 1985. This approach would maintain macroeconomic stability through continued fiscal discipline and credit restraint and would keep the same structural reform agenda, but with an important shift in priorities in the implementation of reforms toward the social areas.

Directors welcomed the medium-term fiscal plan to strengthen public savings. They noted that the authorities have taken sizable measures to begin to offset the sharp increase in the fiscal cost of structural reforms implemented starting in 1995, and recognized that the fiscal position, net of the cost of reforms, had strengthened considerably during the last ESAF arrangement. However, some Directors expressed concern about the rising level of transition costs from the pension reform. Directors supported the authorities’ strategy to secure further declines in the fiscal deficit through steps to reduce tax evasion and maintain firm control on government spending—instead of relying on new or higher taxes—but they urged the authorities to be prepared to take other fiscal measures if the projected revenue gains from better tax administration do not materialize, or in the event of external shocks.

Directors commended the shift in priorities of the structural reform program, with the new emphasis on strengthening education and health reform, managing fiscal decentralization better, and improving governance. Health and education reform merit the top priority, because progress in improving human capital will be critical to improving the quality of life for the poor and to strengthening the prospects for faster growth. Directors urged the authorities to continue to observe the indicators on social policy that have been agreed with the IDA and the IDB under the HIPC Initiative. In addition, they emphasized the need to improve the coordination of spending decisions among all levels of government, and noted the importance of ensuring that decentralization efforts do not result in the loosening of fiscal control and the weakening of the quality of investment. They welcomed the authorities’ intention to incorporate the recommendations of the recent Fiscal Affairs Department technical assistance mission on fiscal federalism into the program for 1999.

Directors were encouraged by the authorities’ intention of further strengthening confidence in the country’s institutions by moving forward on judicial and customs reforms. They also emphasized the importance of carrying out planned reforms in the financial sector, including increasing competition in the banking sector and strengthening supervision. They also welcomed the authorities’ efforts to deepen the domestic capital markets and to advance the dialogue on labor market reform.

Directors commented that the structural reforms implemented in Bolivia were stimulating the recent surge in foreign direct investment, which was setting the stage for faster growth in exports and real GDP in coming years. In this regard, Directors recognized that foreign direct investment flows were among the most stable of capital flows, and that such flows were generally concentrated in the more profitable energy sector in Bolivia. Nevertheless, noting that such inflows could generate larger domestic spending, some Directors cautioned that they carried the risk of overheating the economy and, by pushing the external current account deficit to relatively high levels, could make the external sector more vulnerable to adverse shocks. For this reason, they welcomed the contingency plan to adjust the fiscal deficit target in 1999 in light of the outturn for the external current account deficit in 1998. Directors pointed to the need to achieve the program’s goal of helping to ensure an increase in national savings to keep the external current account deficit on a sustainable path, and to finance the desired increase in domestic investment.

Directors commented that the debt relief under the HIPC Initiative will provide well-timed support that will ease the pressure on public resources during a period when the cost of structural reforms is very high and will further strengthen the external sector. To help ensure that this assistance provides a permanent exit from debt reschedulings, Directors urged the authorities to stay within strict limits on nonconcessional external borrowing by the public sector. In addition, Directors noted that Bolivia’s access to concessional external financing was expected to decline in coming years, as its creditworthiness and per capita income improved further. This made it all the more important to persevere in the implementation of policies to maintain a sound fiscal position.

Bolivia: Selected Economic Indicators

  1994 1995 1996 1997 1998

  (Annual percentage change)
Income and Prices  
Real GDP 4.7 4.7 4.1 4.2 4.7
Real domestic demand 0.9 4.6 4.9 7.1 6.6
CPI inflation (end-of-period) 8.5 12.6 8.0 6.7 6.5
  (In percent of GDP)
Investment and savings  
Total investment 14.9 15.6 16.5 18.7 18.8
Gross national savings 11.2 10.6 11.3 10.5 10.6
Combined public sector  
Overall balance -3.0 -1.8 -1.9 -3.3 -4.1
Foreign financing 3.7 3.6 2.5 2.7 2.6
Domestic financing -0.7 -1.8 -0.6 0.5 1.5
  (Annual percentage change, unless otherwise stated)
Money and credit  
M3 21.6 9.5 24.9 17.1 14.5
Credit to private sector 24.0 12.6 13.6 21.1 14.3
External sector  
Current account balance (US$ million) -219 -335 -385 -647 -702
(percent of GDP) -3.7 -5.0 -5.1 -8.1 -8.2
Of which: trade balance -279 -301 -447 -684 -721
Capital account balance 208 257 727 750 677
Of which: Foreign direct investment 90 177 426 591 623
Overall balance 123 123 342 103 0
Gross official reserves1 5.7 5.6 7.3 7.5 6.8
Public sector external debt (US$ billion)2 4.7 4.8 4.6 4.5 4.3
Debt-service ratio2 3 35.3 42.2 25.6 26.1 23.0

Sources: Central Bank of Bolivia; Ministry of Finance; and IMF staff estimates.

1In months of imports.
2After HIPC assistance.
percent of exports of goods and nonfactor services.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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